S w

905A33

NOTE ON RETAIL LOCATION

Professor Michael R. Pearce prepared this note solely to provide material for class discussion. The authors do not intend to
illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.

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Copyright © 2005, Ivey Management Services Version: (A) 2009-09-24

INTRODUCTION

Location is a retail convenience factor. Ivey #9B05A031, Note on Retail Convenience, puts location into
context with other convenience factors; this note is intended to elaborate on the many dimensions of
locational analysis and decisions.

Location is a retail marketing decision that is typically difficult to change frequently, yet it determines
access to customers, investments in building and equipment, and many operating costs such as rent,
utilities and taxes. In short, it deserves careful attention. Too many start-up retailers are too anxious to get
going, or are over-confident that they can do better than others previously did at the same site, or don’t feel
research is really necessary. Such retailers typically make hasty and poor location decisions as a
consequence.

To make the location decision, most retailers need to determine what major market area to compete in,
what type of shopping area, and then which particular site. The process usually involves the following
steps:

1. Choice of major market area

2. Division of that area into market grids
3. Mapping of competition and customers and termination points
4. Profiling of primary trading areas
5. Potential site identification
6. Detailed site evaluation
7. Actual site decision

Many of the criteria that a retailer may use will be discussed in the next section; however, most of these
criteria require detailed information.

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CHOICE OF MAJOR MARKET AREA

The choice of a country, a region or a city depends on both personal and business factors. The following is
a list of business considerations generally found useful at this stage of analysis.

Market Area Considerations

1. Political/legal circumstances
2. Geographic size, climate and extent of the market area
3. Economic growth potential
4. Population size, age composition, density and growth
5. Income and spending levels
6. Frequency of shopping and average purchase
7. Total purchasing power and retail trade potential (adjusted for outshopping)
8. Competitive saturation
9. Labor market conditions, transportation, advertising media, financial institutions, etc.
10. Proximity to supply from vendors

This process can be facilitated by dividing areas of a map into “grids” for more detailed examination. In
each of these grids, the location of competitors can be plotted, customer counts recorded and so on. For
example, one may isolate major metropolitan areas and then gather information about each of these in turn.
It is important to remember the more desirable an area appears, the more likely other retailers will also be
interested, and thus the more likely that the area will become over-stored. Wal-Mart is a dramatic example
of a firm that succeeded, in part, because it chose locations where its competitors were not interested in
locating — small town America.

CHOICE OF TYPE OF RETAIL AREA

There are a variety of retail location types, ranging from isolated, free-standing spots to locations in mega-
malls. When considering these options, some of the major factors to consider include:

• Access to customers
• Costs (capital and operating)
• Extent of self-determination (e.g. hours of operation)
• Image
• Neighboring retail marketers

Exhibit 1 shows 12 major types of retail locations. Each of these types has numerous variations so their
definitions are somewhat general.

The first group of locations is free-standing stores, i.e., stores that are not located inside shopping centres
or other stores. In such locations, retailers locate on the street front.

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Freestanding Stores

Central business districts (CBDs)

CBDs and downtowns are frequently “unplanned” in the sense that they have evolved over time and are
not controlled by a single owner or association empowered to require conformity. This characteristic has
enabled CBDs to take on personalities of their own, but it has also often led them to deteriorate relative to
centrally managed shopping centres. The CBD is generally the heart of the public transportation system
and is frequented by pedestrian shoppers, and retailers located in the CBD will usually fight hard to keep it
that way. Most CBDs contain the major branches of department, apparel and specialty stores and often, no
major grocery outlets. CBDs are generally characterized by lots of hospitality and entertainment retailing.

In some CBDs, there has been extensive revitalization; in others, lack of political agreement and/or funds
has resulted in substantial decline. Many CBDs contain major shopping centres and office complexes with
ancillary retail space. A variation on CBD development is the substantial underground shopping networks
in some metropolitan areas. In Toronto’s CBD, for example, there are approximately 3.5 kilometres of
underground walkways linking more than 600 stores, many of which are actually located underground.1

The frame of a CBD is the area immediately surrounding the core, and it is characterized by less
dependence on pedestrian traffic. Secondary business districts are areas servicing major portions of a city.
They can be thought of as mini-CBDs. String or strip street districts develop along lines of mass
transportation or main thoroughfares.

Clusters of neighborhood stores

There are clusters of stores located throughout neighborhoods, yet still free-standing and not managed
centrally. Such stores tend to be oriented toward providing convenience-goods and serve small trading
areas.

Isolated locations

There are also free-standing stores along highways, in rural areas, on the fringes of cities and so on. These
are frequently occupied by either “small town variety stores” or larger “shopping goods stores” that can
locate in less expensive places (such as discount furniture stores on the edge of town).

Strip malls/centres

Sometimes known as plazas, strip malls (strips) typically consist of less than 150,000 square feet of space
with four to 10 stores, adjacent to one another, without a common area inside (i.e. there are separate store
entrances from a common parking area in front of the strip, but off the street). Some newer centres are
putting the parking behind the stores rather than in front. Strips usually have convenience-oriented stores,
such as a dry cleaner, video rental store, bank, donut shop and convenience variety store. The number of
strip malls has been growing rapidly, whereas growth in the number of other types of shopping centres has

1
Chris McConvey, “A Study of the Retail Structure of Toronto’s Underground Pedestrian System” unpublished term paper for
Retail Marketing Management course, Western Business School, The University of Western Ontario, 1990.

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slowed down dramatically. Strips cost less to build and to occupy, can “in-fill neighborhoods” (provide
locations between other retail centres), provide better identification of stores to customers and offer in-and-
out convenience to customers.2

Power centres

Power centres are a new retail type, or at least the name is new. These are very large strip malls, typically
anchored by two to five large category leader stores (such as Home Depot) or a superwarehouse
supermarket (such as Loblaws’ larger units). Generally, there are few stores, and most of the space is taken
by the anchors. These centres are 225,000 plus square feet and usually located on or near major highways
or their arteries.3

Inside Shopping Centres

The second set of locations are inside shopping centres, where retailers locate “on the aisle.” Shopping
centres are a relatively recent retail form, having evolved from “markets” of old. Harold Carlson, an
eminent authority on shopping centres, has argued that shopping centres have had extraordinary impact on
retailing and on society:

However, in an operational sense, a shopping centre is a management concept, not a

building. As a planned collection of retail outlets, each with its own identity, each
independently owned, but all working together as a single business enterprise, they have
transformed the landscape of America (and elsewhere) in a little over 40 years and have
had a major impact on our way of life . . .

If a marketer were seeking to be in direct contact with the largest number of Americans
possible at one time, chances are the marketer’s best bet would be to go to the shopping
centres of the nation on any Saturday afternoon. Current research indicates that almost
every American adult visits a shopping centre at least once a month — that’s more than
170 million people 18 years or older. Most make about two trips to a centre every week.
Increasingly, they are America’s choice for leisure time activities and entertainment.
While privately owned, many centres are the de facto hub of community life.4

Shopping centres can and should be managed as large stores — with both ultimate customers and
intermediate customers (the retail tenants) to satisfy. For example, shopping centres have an image of their
own, above and beyond the stores they include, which bears on whether shoppers patronize the centre.5
Leonard Berry spoke of shopping centres as follows:

The right way to think about a shopping mall is to think of it as a very big store. Each of
its pieces should fit together. A cohesive theme and a consistent pattern should prevail.
The mall should represent an attraction, an overall bundle of benefits, that is greater than
the sum of its parts. The mall should be a strong brand — a clear promise — that tells
2
Eric C. Peterson, “Strip Centers: Changing?” Stores, March 1990, pp. 53-54.
3
Eric C. Peterson, “Power Centers! Now!” Stores, March 1989, pp. 61-66.
4
Harold T. Carlson, “How Shopping Centers Reshape Retailing: Past, Present, and Future,” International Trends in
Retailing, Arthur Andersen & Co., Spring 1990, pp. 33-44.
5
Carman Cullen, Involvement as a moderator of image-patronage relationships unpublished doctoral dissertation, Western
Business School, 1989.

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consumers what to expect. It should be an effective means for unifying otherwise

independent retailers so that the promise is delivered.6

Definitions of enclosed shopping centres vary somewhat.

Neighborhood centres

A neighborhood centre is a small enclosed 10,000 to 100,000 square foot shopping mall selling
convenience goods and services. There are usually 10 to 20 stores, often anchored by a conventional
supermarket.

Community centres

Community centres are the next step up from neighborhood centres. These offer broader selections of both
convenience and shopping goods in 100,000 to 200,000 square feet of selling space and 20 to 30 stores,
usually anchored by a junior department store and supermarket.

Regional centres

Regional centres are bigger still. These are at least 200,000 square feet with 75 to 200 or more stores
specializing in apparel and general merchandise. Often, there is no supermarket, but rather one or two full-
line department stores. A related form is super-regional centres, which are bigger multi-level versions of
the regional centre, containing at least three main anchors and a minimum of one million square feet of
space.

Theme malls

Theme malls can be of all sizes. They are distinct from other forms in that they focus on limited categories
of goods or particular types of stores. For example, recently, many off-price malls and factory-outlet malls
have been built. Home design has also been a popular theme.

Mega malls

This term is used for the largest shopping centre complexes, which are millions of square feet in size. They
contain at least three to five full line department store anchors, a wide variety of 400 to 850 specialty stores
(often with multiple locations in the same complex), and usually a lot of entertainment attractions. West
Edmonton Mall in Edmonton, Alberta, has been a prototype.

6
Leonard L. Berry, “Editors Corner” in “Farewell, Field of Dreams” by Francesca Turchiano, Retailing Issues Letter,
November 1990.

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Other Local Options

Two other locational options are concessions/leased departments and non-store locations.
Concessions/leased departments are essentially stores within stores. Many larger stores, especially
department stores and mass retailers, are willing to rent space to operators of small shops. This
arrangement provides a home for the smaller operator and an enhanced assortment for the bigger store.
Frequent users include specialty apparel retailers and a broad range of service retailers, such as opticians,
travel agents, hair salons and financial services. Non-store locations is the miscellaneous category for all
other retail marketers, such as vending machine operators, mail order vendors, door-to-door firms, Internet
retailers and so on.

Each of these types of locations has its own advantages and disadvantages and each has special
management challenges.7 With the recent recession and over-storing in North America, there have been
fewer new locations opened (especially major shopping centres), more emphasis on renovation and more
opportunity to take over another’s lease. Specialty store expansion has slowed and major operators have
been exploring the possibility of making their stores “destination stores,” meaning less reliant on the
attraction of a centre or neighboring retailers.8

All retailers when making location decisions face the question of whether to go where customers are (and
pay higher real estate costs) or go where customers are not (and pay higher advertising and other costs to
attract customers to them). This issue and others related to choice of location are discussed in the next
sections.

TRADING AREA

Before discussing site selection, it is important to understand the concept of a trading area. Each store or
group of stores has a trading area. A store’s trading area is the geographic area where the majority of the
store’s customers (or potential customers) live or work. Most retailers think in terms of where customers
live; however, for those retailers who rely on customers shopping near where they work (such as a
restaurant in a CBD reliant on lunch-time business), it is much more relevant to concentrate on where
customers are employed. A trading area can be defined in terms of distance or driving or walking time. It is
often divided into zones of core, primary, secondary and tertiary shoppers, although such division is not
necessary for many retailers. For example, core shoppers may be defined as the one-quarter of the total
customer base of a store comprising the most frequent, highest volume customers. Such a definition is
arbitrary.

The major reasons for determining a trading area are (a) to determine market potential and (b) to assist in
planning the scope of advertising and other marketing efforts.

There are three basic techniques used to determine the size and shape of a store or shopping centre’s
trading area. Some are elegant such as gravitational and demand-gradient models; others are quite
mundane, such as customer-origin recording. Whatever technique is used, it is important to undertake the
effort from time to time. The size, shape and composition of the trading area are critical to a retailer’s

7
For example, for an overview on mall management issues, see Marvin J. Rothenberg, “Mall Marketing Principles That
Affect Merchandising” Retail Control, October 1986, pp. 2-36 and Peter G. Martin, Shopping Center Management, Spon
Publishing, 1982.
8
David P. Schultz, “Specialty Expansion Slowing,” Stores, December 1990, pp. 35-38. See also Mike Reynolds, “Revamps
on the Rise” Stores, July 1990, pp. 34-40.

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success. If an area cannot support the retailer, sooner or later that retailer will be out of business.9
Obviously, it is much easier to determine a store’s existing rather than its potential trading area. If none of
the following methods can be used, a retail marketer may simply have to work out a couple of “best
estimates,” using whatever information is available.

1. Customer Spotting

A straightforward method of determining one’s trading area is to draw a representative sample of the
store’s customers and plot their residence or work addresses on a map. The sample can be obtained in a
number of ways: (a) indirectly, through credit records, sales slips, mailing list analysis, contest entries or
even license plate analysis and/or (b) directly, by asking customers. A common method today is the use of
postal codes. In Canada, each six-character postal code represents a very small geographic area, so using
postal codes is generally sufficiently accurate for trade area identification. The trading area can be
determined either by drawing lines encompassing certain proportions of the customer base (such as 50
percent, then 75 percent, etc.) or by drawing successive circles a certain distance away from the store (such
as one-half kilometre, one kilometre, etc.) and seeing how many customers are in each circle. Whatever the
method, the idea is to get an understanding of the source of customers relative to the store’s (or shopping
centre’s) location.

2. Retail Gravitational Models

Less straightforward for the retail practitioner is the use of gravitational models. Such models are used
primarily by market geographers and planners conversant with statistics. These are generally used to
predict future trading areas using such factors as population size and distance. Most models build upon the
seminal work of W.J. Reilly.10 Reilly’s Law is an equation that holds that a trading area is predictable from
the size of its market centre. That is, its formulation is based on the notion that the bigger the store (or
group of stores), the greater its attraction power and, hence the bigger its trading area.

P.D. Converse added a variation to this notion by examining the relative attraction of two centres to
determine how customers between the centres will behave. He formulated a method of calculating the
“breaking point” between two trading areas, or the point at which customers are indifferent about shopping
at either of the two locations.11 By calculating several breaking points, one can determine the boundaries
of one centre’s (or store’s) trading area relative to surrounding competitors.

3. Demand-gradient Models

Demand-gradient models have been built on the basic assumption that the greater the number of items
carried by a retail centre, the larger a shopper’s expectation that a trip to the centre will be successful and,
hence, the more likely a shopper will travel to that centre than to another. Thus, for any one centre, there
are “probability curves” that diminish outwards around it where these probability curves represent the
probability that customers in that “gradient” will patronize the centre. For example, a large regional
shopping centre will have a larger trading area than a small strip mall, and the demand gradients will be

9
For a good treatment of trade area analysis, see Avijit Ghosh, Retail Management, Dryden, 1990, Chapter 9.
10
W.J. Reilly, Law of Retail Gravitation, 1931.
11
Ibid.

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correspondingly spread farther apart. The 50 per cent gradient will be tightly drawn around a small
convenience store, whereas it will be much farther away for a regional general merchandise mall.

Both gravitational and demand-gradient models are most often used for city and regional planning
purposes and less by individual retailers. Use of these models requires good data and statistical
understanding. The assumptions behind these models should be examined whenever they are used. For
example, they assume that size is an adequate proxy for all the other features of a shopping centre to
determine why customers patronize one rather than another. While there is no question size is important,
increasingly it seems customers divide their shopping trips among several centres and stores, and thus do
not regularly or predictably always go more to the bigger centres.12

Trade areas are circles only in theory, but seldom are they circles in reality. There are many factors that
influence the actual trading area, physical size and shape (see Exhibit 2).

FACTORS TO CONSIDER WHEN EVALUATING A SPECIFIC SITE

Anyone considering establishing a store on a new site or acquiring an existing store has a host of factors to
assess. Retailers usually have their own priorities when assessing specific sites. Some seem to place more
emphasis on demand, others on competition and yet others seem to focus on costs. These leanings will
influence which specific methods are used to evaluate the many characteristics of particular sites. Some
techniques are simple judgmental ranking approaches while others are more sophisticated statistical
techniques. The intent of each approach is the same: to narrow down alternatives and to assist in making a
choice with a good chance of success (see Exhibit 3).13

Of course, all considerations in Exhibit 2 need to be translated into sales and financial projections to
determine whether the site will meet the retailer’s objectives. A list of selection criteria prompts many
retailers to develop a site-ranking scheme. Typically, either an average or weighted score is assigned to
each site in total. Such approaches have the obvious attraction of simplifying the many considerations into
an index number; however, care must be taken not to double-count factors (such as including profit and
factors that presumably determine profit) in the index and care must be taken to identify where judgments
are being made. The tradeoffs are, of necessity, judgmental in the final analysis.

APPROACHES TO ESTIMATING MARKET POTENTIAL

One of the most challenging tasks facing any marketer is the preparation of sales forecasts. When assessing
a site, a retail marketer should attempt some forecasting. There are a few basic approaches to this task.

Analog methods

If the retailer has had experience with a comparable site or store(s), then an approach, which may be used,
is to develop an analog from existing experience as a basis for predicting the future at this site. For
example, a chain store executive may match a proposed site with two or three existing stores most similar
to the proposal. Then, based on the history of the existing store(s), projections for the proposed store are

12
Michael R. Pearce, et al., The London Retailing Study, The University of Western Ontario, 1984.
13
For a particularly good treatment of site selection techniques, see Ken Jones and Jim Simmons, Location, Location,
Location, Methuen, 1987, Chapter 10.

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 Page 9 9B05A033

developed, making whatever adjustments seem appropriate in the numbers. For example, projected sales
may be calculated on a sales-per-square-foot formula when store sizes vary.

The analog method is sometimes extended by using statistical techniques, such as multiple regression
analysis. Such a model may be built using many existing stores as a base. Then, using this model, any
proposed store and site can be “plugged into” the model and forecasts generated. Care should be taken
when using such approaches that they do not become too mechanical. Any retailer considering a new site
had better spend time at the site looking around, as opposed to sitting in a distant office playing with
numbers on a computer.

Share of space, share of sales methods

If there is no comparable experience to use as an analog, a retailer must use a “market build-up” method of
forecasting. If the necessary data are available or can be reasonably estimated, then the approach is
straightforward. Multiply the number of households in the expected trading area times the mean annual
disposable income. Then, multiply this number times the proportion of an average household’s disposable
income that on average is spent on the specific product or service category in question. This formula
provides a rough estimate of sales in total in the area. For example, suppose, for a mythical trading area,
average household disposable income is $25,000, the number of households is 1,000 and the proportion
spent on clothing is 10 per cent. Then the sales of clothing in that trading area is $2.5 million.

Notice, this approach does not take into account “out-shopping.” For example, if residents in a trading
area do much of their apparel shopping in another city (or across the border), the local trade area potential
may appear statistically larger than it really is for the stores in that trading area.

The remaining question is how much of that total calculated potential a retailer considering a new site may
achieve. For example, a retailer may judge that since the new store will account for one-fifth of the space
in the trading area devoted to apparel retailing, that is, that sales will, in time at least, be $500,000 in our
example. This estimate may not be a reasonable conclusion to reach; however, it is important to remember
that this is a judgment that may be assisted by calculating the index of retail saturation, by assessing the
relative strength of competitors and by assessing realistically one’s attractiveness to customers.

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Exhibit 1

MAJOR TYPES OF RETAIL LOCATIONS

In free-standing stores 1. Central business districts (CBDs)

2. Clusters of neighborhood stores
3. Isolated locations
4. Strip malls/centres
5. Power centres (“big box” groupings)
Inside shopping centres 6. Neighborhood centres
7. Community centres
8. Regional centres
9. Theme malls
10. Mega malls

In other stores 11. Concessions/leased departments

Non-store locations 12. Mail order, Internet, etc.

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Exhibit 2

FACTORS AFFECTING ACTUAL TRADING AREA SIZE AND SHAPE

Factor Example
1. Natural and artificial • rivers, railroads, hills, etc.
barriers
2. Proximity to larger or • a rural general store will have a larger geographic
more attractive market trading area than an equivalent store in a city
areas
3. Available transportation • ease of getting around by public and private means
4. Psychology of distance • some people seem to find a block too far to walk
prevailing in that area
5. Existing competitive • who else is close by that will impact on drawing power
alignment of the store
6. Population density • in a highly dense population, such as Tokyo, trade
areas can be small geographically but still contain
adequate numbers of people
7. Buying habits of people • Europeans still do much of their shopping without a
car, and this characteristic determines the range they
will shop from home
8. Communication • factors such as the circulation of the local newspaper
will affect who even knows about the store and its
offerings

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Exhibit 3

EXAMPLE CONSIDERATIONS IN SITE SELECTION

1. Is the site close to a sufficient number of the target customers? For example, if intending to attract
female teenagers, how close is it to the high school? In other words, what is the volume and quality of
shopping traffic (vehicular and pedestrian) at this site now and potentially?
2. Is the site easily accessible to customers? For example, where are public transportation stops, how
wide is the street and is it divided, which side of the street gets the most traffic, is there much traffic
congestion, is there available parking (number of spaces, cost of parking, its distance to the store)?
3. What is the history of the site? Have other similar retailers been at the same site and failed? Is there
any “stigma” attached to the site that may affect business?
4. What are conditions like around the site? Are there neighboring retailers who are complementary in
business who will increase customer traffic, are there excessive store vacancies, is there crime and/or
unpleasant loitering, are sidewalks in good repair, what hours are other retailers open?
5. How strong are nearby competitors and how many are there? Are apparent sales in these stores
unusually high, do customers find stores crowded and service slow, do customers have to travel
further than they want to shop? An index of retail saturation can be calculated as follows: number of
customers in the area times retail expenditures in this category per customer all divided by the square
footage of selling area of all competitors in that category in the trading area, including the proposed
new store equals, the Index of Retail Saturation per square foot. This number represents the average
sales per square foot of all competitors. If this number is substantially below the level required for a
profitable operation, then the area is over-stored already and the retailer should be sure he or she can
compete successfully with established firms before settling on the site.
6. Is the site visible? Can signs and/or the storefront be seen at an appropriate distance?
7. What are the relevant physical characteristics of the site and its building? What is the size, condition
and shape of the lot and building? What will be the investment requirements?
8. What are the terms of occupancy? How much will it cost to own or lease, to operate and maintain?
Occupancy costs include rent or mortgage, overhead, common area costs, taxes and any other costs
that are directly related to doing business in that location. What are the zoning and other local
regulations (and perhaps lease terms) that will impact on what the retailer can and cannot do with the
property?
9. How important is convenience of location relative to spending resources on other aspects of the
marketing program to attract customers to a less convenient location? Is it better to spend extra money
to locate in a high-traffic spot or to spend money advertising to draw people to a less high-traffic spot?

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